PARIS, Jan 27 (Reuters) - France and Germany said on Monday
banks should ring-fence speculative activities from other
business lines rather than be banned from them outright, setting
out their position ahead of European Commission proposals aimed
at limiting risk.

On Wednesday, the EU executive will propose a draft law to
rein in risks from trading at banks to make it less likely
taxpayers will have to bail out lenders if trading bets go
wrong.

The draft law is expected to propose an outright ban on
speculative trading on the banks' own behalf - called
proprietary trading - rather than simply ring-fence such
activities as Germany and France suggest.

"We have confirmed our agreement in principle on the
separation of speculative banking activities," French Finance
Minister Pierre Moscovici said after a meeting of the French and
German finance ministers and central bankers in Paris.

A statement from the French Finance Ministry said Germany
and France wanted to preserve their so-called universal banking
model, in reference to big lenders with multiple business lines
such as BNP Paribas, Societe Generale and
Deutsche Bank.

Moscovici and his German counterpart Wolfgang Schaeuble both
told journalists they wanted the European Commission to take
into account laws already in place in the two countries.

The French minister said their laws were already perfectly
in harmony with the so-called Liikanen report, which the
Commission is using for inspiration and calls for separation of
speculative activities into their own division of the bank.

While such an arrangement allows speculative activities to
be under the same roof as other parts of the universal bank
model, the Commission is believed to want to go further with the
proposal to ban speculative or proprietary trading.

Last week Reuters reported that France and Germany also
wanted more lenient treatment of non-speculative trading
activities at banks as they worry that over strict rules could
hamper lenders' ability to funnel financing to the economy.

TRANSACTION TAX

The French Finance Ministry's statement said the two
countries would come out with joint proposals in the coming
months to reach a compromise on a separate financial transaction
tax, planned by 11 EU countries.

Countries discussing the tax are trying to hammer out a
revised proposal which will make banks repay some of the aid
that kept them going during the 2007-09 financial crisis.

Schaeuble said France and Germany aimed to ensure that a new
transaction tax did not harm the functioning of their markets.

Though originally a driving force for the tax, France has
sought to soften proposals for it, eager that derivatives, where
French banks are key players, are exempted.

Deeming the tax to be "indispensable", German Economy
Minister Sigmar Gabriel, also present at the Paris talks, said:
"The balance has to be found between taxation and regulation of
financial markets, there is no question of disrupting them."

The financial sector is bracing for the new tax and tougher
regulations, which come as the European Central Bank begins
poring over their assets to check that their balance sheets are
sufficiently solid.

"There is no reason why we should find any dramatic
situations given the efforts that have already been made," Bank
of France Governor Christian Noyer said.
(Additional reporting by Huw Jones in London; Editing by Nick
Vinocur, Mark John and Alison Williams)